Putting the Latest Silver Crash Under a Lens

Monetary Metals's picture

On Thursday, July 6, in the late afternoon (as reckoned in Arizona), the price of silver crashed. The move was very brief, but very intense. The price hit a low under $14.40 before recovering to around $15.80 which is about 20 cents lower than where it started.

Buyers of silver are rejoicing. They can now get more money (silver, like gold, is money) in exchange for their dollars than before. However, as we see from the reactions in the community, there were few buyers.

Cries of woe are heard everywhere. Those who are crying are sellers, including those who say they don’t plan to sell but who really want a high price in case they change their mind by Monday morning.

If you want to see what it looks like when everyone is thinking of buying, look at the bitcoin market when there is a price drop. The enthusiasm is palpable. Everyone is gloating about buying the dips, with faith unbroken that the cryptocurrency is on its way to shoot past $10,000 if not $1,000,000.

Gold and silver are the opposite. For now. And perhaps that is a sign that here is a good opportunity. Blood in the streets, as the expression goes.

The purpose of this article is to look deeply into the trading action at the time of the crash. First, here is a graph showing the bid and offer prices for about 50 seconds. The horizontal axis shows time, but it is ticks rather than seconds or milliseconds. So, for example, it does not show the 10-second period when CME halted the exchange.

For most of this time period, there is an orderly market as seen in the tight bid-offer spread, though even from the start we observe that on price drops the bid drops more. That becomes extreme where the bid hits $14.10 (which occurs right after the halt). From that point onwards, we see a very wide bid-offer spread. The bid looks to be held low deliberately, around $14.33, while the offer is moving around as buyers begin lifting it.

Let’s address the wide spread. The banks have been under assault for their trading practices. Among other things, they are blamed for having proprietary positions, for “leaking” information during the Fixing, for having a too-large position, etc. The net result is to push the compliance department into prominence. No longer can the bank act when the market offers a profitable opportunity for arbitrage.

Arbitrage causes spreads to tighten, as part of the process of making money.

But before a bank may arbitrage something, they must weigh their proposed trade against the new regulations. And of course, always they must be aware of the optics. It does them no good to make a perfectly legal trade that will bring resentment, more regulatory scrutiny, and possibly litigation.

For example, what is the difference between a “prop” (proprietary) trade, and ordinary market-maker arbitrage? Don’t bother trying to answer this question. Unless you are a commodities lawyer who is intimately familiar with the regulations as they existed on July 6, and also familiar with the current interpretations of the regulators, you cannot answer. Regulations can make distinctions between two maddeningly similar actions, or even identical actions in confusingly similar contexts. On one side of the distinction lies your right to earn a profit. On the other side is regulatory action, penalties, brand damage, and possibly an extended visit to prison.

With such large differences in outcomes, based on such fine lines between actions, you can bet that the banks are backing away from trades they would otherwise take. They are becoming more conservative and making less money. And leaving the market less efficient, more costly to do business in, and more volatile.

In this light, we submit for your consideration the fact that after 23:06:50 the banks were leaving 10 to 12 cents per ounce on the table. That is an attractive profit for a market maker, and it takes a powerful force to keep them from wanting to earn it.

Ironically, the net result of all this pressure on the banks is the opposite of what the gold and silver community wants. It does not cause the price to rise. Instead, it contributes to two other phenomena. One is higher volatility. Crashes like this occur when the stack of bids is thin. That is precisely what happens when banks are under pressure to stand back.

Two is rising costs. The bid-offer spread is the cost of a round-trip. It is one measure of the friction in the market. This cost affects traders, producers, and consumers of metal. Silver has long been the most hoardable commodity for workers to set aside part of their weekly wages, because its spread is the narrowest for the quantities involved. These regulations are undermining silver for this use.

A word on the thin market. Unlike the June 26 crash on (which we wrote about), this one occurred when Europe was asleep and the US was mostly offline. Markets were open in Sydney, and perhaps a few early risers in Asia (7am in China). However, in a liquid market, there would be little impact to such selling even then. Indeed we see in gold, the price drop was $5—hardly worth writing an article about.

Regulations imposed on prop trading, insider trading, position limits, asset reservation, and other aspects of running a market making operation drive down liquidity. Whether this move was triggered by stop-loss orders or something nefarious, we do not know (we can only say that we see no reason why governments or central banks would care about the price of silver).

Here is a chart of what happened in the one minute after 11:06pm GMT, millisecond (1/1000th of a second) by millisecond, showing volume-weighted average price overlaid on number of contracts traded.

At this time scale, we can see there are upticks. Yes even in a crash like this one, there are upticks.

To reiterate what we said in our last forensic analysis of a crash, in a free market there would be no such thing as gold or silver. The futures market is for goods that are produced seasonally, but consumed throughout the year. It is a market for warehousing.

There would be an interest-rate market for gold, i.e. a bond market. A gold futures market is a bizarre creature, created by the artificial environment of irredeemable currencies and laws that force everyone to use them.

In that context, a futures market for gold makes sense in a way. It is a way to bet on the price action, to generate profits in dollars. Like all other derivatives markets, the gold futures market offers leverage so that traders can maximize profits even when price moves are small.

Of course, big leveraged positions mean big risk. That is why they must set tight stop-loss orders. This is one possible explanation for the crash. Initial selling triggered stop orders, and those triggered others, and with a thin stack of bids, whoosh.

And it is also the basis (no pun intended) of our basis analysis. We like to see how much these leveraged bettors are moving the price.

This brings us to the unique Monetary Metals analysis. If the price of spot is falling relative to futures, then we know there was selling of spot. If the price of futures is falling relative to spot, then we know there was selling of futures.

This spread, future price – spot price, is called the basis.

Below is a chart of the silver price overlaid with the September silver basis from 10pm to midnight GMT.

No question, we see selling of futures. Whether these are stop-loss orders or something else, we don’t have the data to say. What is certain is that the basis drops twice. First, just prior to 22:40 when the price is rising. There is some buying of metal here. But then that buying fades and is replaced by buying of futures, thus the basis recovers and rises about 5bps above its initial level.

Then the basis drops, starting just prior to the price drop. So the first bit of selling of futures appears as a drop in the futures price relative to spot, though price does not move much initially. Then the thin bid is pierced, and the price goes over the edge of the cliff.

The basis begins rising, going more +30bps over its starting point. This is a frenzy of buying—of paper (futures).

Other than that brief blip up in price from around $15.88 to $16.10, this episode was not about physical metal.

 

Monetary Metals will be exhibiting and FreedomFest in Las Vegas in July. If you are an investor and would like a meeting there, please click here.

 

© 2017 Monetary Metals

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skipweston's picture

Wikileaks:  December 10th, 1974   LONDON WHOLESALE GOLD DEALERS' VIEWS ON U.S. GOLD SALE AND

 PRIVATE U.S. OWNERSHIP

 

5. ALSO EXPRESSED WAS THE EXPECTATION THAT LARGE VOLUME FUTURES DEALING WOULD 

CREATE A HIGHLY VOLATILE MAR- KET. IN TURN, THE VOLATILE PRICE MOVEMENTS WOULD

 DIMINISH THE INITIAL DEMAND FOR PHYSICAL HOLDING

 AND MOST LIKELY NEGATE LONG-TERM HOARDING BY U.S. CITIZENS. 

  AS TO FUTURE DEMAND BY U.S. CITIZENS FOR GOLD,

 MOST DEALERS DID NOT FORESEE DEMAND FOR PHYSICAL HOLDING AS SIGNIFICANT.


They succeeded: only 1.5% of US Investors own Gold or Silver

aloha_snakbar's picture

The crash was the usual suspects circle jerking each other...same as it ever was. It has no basis in reality in my world, and in my mind no effect on the price/VALUE of physical silver. Jackhammer it lower, bitchezzz... it just means I will buy more...

Conax's picture

This guy also forgets that some people are "all in" and are not in buying mode.

Besides, who doesn't want to see their assets increase in dollar value?

Emergencies come up, shit hits the fan, you never know. You don't want your savings all beaten down in value right when you might need them. Newbs enjoy cheaper silver, older dudes (like yours truly) enjoy watching it move upward. I mean, damn. Silver is at less than half its highest price in .... 1980! 37 years ago and many trillions of dollar printing later and it's a fraction of what it was. Not good.  It  is  completely m-a-n-i-p-u-l-a-t-e-d.

MM is a hack for the banksters.

Dickweed Wang's picture

 It  is  completely m-a-n-i-p-u-l-a-t-e-d.

 

Yes indeed . . . and that's why I have such a problem with this article.  It is like a treatise on how that crash was something natural and in the end he questions why governments would care.  What an asshole.

Global Douche's picture

I took full advantage of adding another brick, just like you see in my avatar, to my sta$h a few days ago, freshly added to the vault. To mister Fat Fingers who Finds ways of jacking up this market with the guv-mint's blessings, my thanks and a heartfelt "Fuck You!" for the gifts you continue to $hower $tackers with impressive $avings on the phyzz. I'm also in Silver Savior's camp as an early Bitcoiner and long-term hodler that crypto certainly has a place at the table.

 

Silver Savior's picture

Comments like these just want to make me cry in joy. People are starting to get it. Bars are sure nice to hold in your hand and thinking about hedging against wicked witches. 

Seriously all I think about all day is how far out my bills due dates are and I see how much money I can spend on silver, gold and crypto in that order. Thanks banksters for letting it be so cheap and thanks for making it hard on yourselves later! You deserve it!

Bemused Observer's picture

Too complex an argumentation, it seems too much like being distracted from the receeding tide by all the neat stuff left on the beach...the fact IS, that tide is coming back, soon, and we all need to get to higher ground.

 

Be it gold, guns or bitcoin, stack SOMETHING and make tracks away from the damned beach!

Silver Savior's picture

I buy gold and silver right along with crypto. Why on Earth would someone not want all the asset classes and fully cover their asses? They are walking around with one ass cheek naked. What is wrong with people?

Dickweed Wang's picture

. . . we can only say that we see no reason why governments or central banks would care about the price of silver.

 

This statement in and of itself shows the writer of this piece of crap article is totally clueless.  Governments (i.e. the USA) and central banks (i.e. the Fed) have a vested interest in driving down and/or supressing the price of monetary metals like gold, and particularly silver (because it's "the people's money"), to strengthen faith in their totally worthless fiat currency (not money) called the US Dollar.  If the guy writing this article can't get his head around that issue why would anyone believe any of his other "analysis"?

DanDaley's picture

Monetary Metals is Keith Weiner, and if you know how he views metals, it explains a lot.

anarchitect's picture

There's also this: "there were few buyers"...."[the chart] does not show the 10-second period when CME halted the exchange."

More cluelessness.  No one buys silver from the CME.  They buy silver derivatives, and the odds in the casino are similar to those for three-card monte.

Hitchens Ghost's picture

Even if silver is not tilt money, it is a strategic asset. Further, of gold is outlawed, then silver becomes a de facto price tracker.
You bet your ass they cared about silver when they asked buffet to not take delivery in 97

Harlequin001's picture

I looked at it under a lens and came up with a $2 Billion manipulation hit.

Everything else this idiot writes is just horseshit. Get a day job dude.